Internet sales tax bill could boost state budget by $184 million

After years of talk, Congress is moving toward possibly ending a loophole that has prevented states from collecting sales taxes on many Internet purchases.

The U.S. Senate could vote this week to approve the Marketplace Fairness Act, which would end the longstanding tax advantage enjoyed by Internet retailers like Amazon.com over their brick-and-mortar competitors.

The proposal, which passed a test vote Monday in the Senate, would require companies with sales of more than $1 million to begin collecting sales and local taxes for purchases over the Internet.

That could mean a big windfall for the Washington state treasury — bringing in an additional $184 million for the 2013-15 budget, according to an estimate by the state Department of Revenue. That would rise to more than $567 million in 2015-17 as compliance ramps up, the state predicts. Cities and counties would also get a share – more than $278 million by 2015-17.

But lawmakers currently haggling over the state budget are not expecting that money to bail them out — at least in the short term.

“Counting that the U.S. Congress would actually do anything related to taxes seems absurd to me,” Rep. Ross Hunter, D-Medina, the chief budget writer for House Democrats, said in an email. “If it happens life is good. If not we keep working.”

State Sen. Andy Hill, R-Redmond, the lead budget writer for the state Senate’s GOP-led majority caucus, agreed it wouldn’t be prudent to bank that cash in the current budget. But Hill said he hopes Congress will eventually get there. “I think long term it is going to happen,” he said.

The bill before Congress would not create a new tax. Legally, consumers are responsible for paying their state’s sales tax on Internet purchases now –but few do when the tax isn’t automatically added to their online bill.

That loophole has been leveraged for years by companies like Amazon to offer lower prices than many main street stores, and even big box competitors. Amazon currently collects sales taxes on purchases of items delivered to residents in nine states, including Washington.

In 2012, according to a University of Tennessee study, states lost an estimated $23 billion in legally owed but uncollected sales taxes as a result of the loophole, which was established by a 1992 Supreme Court ruling that said states can’t compel out-of-state businesses to collect those taxes unless Congress grants the authority.

State budget writers are probably wise not to count on swift congressional action. Although the sales-tax bill has some measure of bipartisan support (and Amazon is backing it too) anti-tax conservatives have started to raise a ruckus. Its prospects are not at all clear in the Republican controlled House.

Jim DeMint, the former Republican senator who now heads the Heritage Foundation, has called the online tax “taxation without representation” and accused states of pushing the measure to avoid making hard budget choices. And anti-tax crusader Grover Norquist has also come out against the law.

Here is the estimate of how much additional revenue state and local governments would collect if Congress passes the Marketplace Fairness Act by Sept. 30:

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Politics Northwest is the go-to blog for politics in our region. The blog explores national, state and local political news and issues. Reporters from Washington, D.C., to Seattle City Hall to the state capital in Olympia contribute. Editors are Richard Wagoner and Beth Kaiman.